The Accounting

Equation
An Introduction

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All businesses have three parts to their
financial makeup:
• The things or property that the company owns.
We call these things ASSETS.

• The money that the company owes to other

people.
We call these obligations LIABILTIES.

• The claim of the owner of the business to the

Assets after the Liabilities are paid.
We call this claim OWNER’S EQUITY (or just
EQUITY). 2
 These three parts ALWAYS have the
same relationship to each other. We
call this relationship the

Accounting Equation

Assets = Liabilities + Equity

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 The Accounting Equation could also apply to a
personal situation. Suppose you buy a car for
$5,000, borrow $4,000 from the bank, and pay the
rest yourself. Here’s the result:
Accounting Equation
Assets = Liabilities + Equity

$5,000 = $4,000 + $1,000

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 ASSETS are the
RESOURCES OWNED BY A BUSINESS .
Here are some types of assets that might
be owned by a business company:

Accounts Cash Notes

Receivabl Receivable
e

Vehicles ASSETS Land

Store Buildings
Supplies
Equipment
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 LIABILITIES are the
CREDITOR’S CLAIMS ON ASSETS.
• Creditors are the people or companies to whom a business
owes something (like money).
• Here are some types of liabilities that a company might owe:

Accounts Notes
Payable Payable

LIABILITIES

Taxes Wages
Payable Payable

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 EQUITY is the OWNER’S CLAIM ON ASSETS
In a business EQUITY is composed of four
parts that either increase or decrease equity:
EQUITY

CAPITAL: WITHDRAWALS REVENUES: EXPENSES:

What the
owner
− :
What the
+ What the
company
− What the
company
puts into owner takes receives pays to
the out of the for sales operate the
business business business.

INCREASE DECREASE INCREASE DECREASE

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Sometimes we expand the Accounting
Equation to show all the Equity
components. This is called the
EXPANDED ACCOUNTING EQUATION.

This equation must

ALWAYS BE IN
BALANCE
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